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Not long to go now. The biggest changes to the pension asset test in 10 years will occur in less than 2 months, on 1 January 2017. There will be winners and losers, and even those not effected might be worried anyway. If you’re a pensioner, the important thing is to know which of these groups you fall into and then decide how best to deal with it.

If you have a financial planner and they are worth their salt, they’ll be talking to you now about the changes and putting strategies in place to minimise the consequences. If they are not, hmmm….

What is changing?Currently the asset thresholds (ignoring the value of an owner-occupied home) are:

Single Homeowner $209,000

Single Non-Homeowner $360,500

Couple Homeowner $296,500

Couple Non-Homeowner $448,000

​The fortnightly pension payment reduces by $1.50 for every $1,000 over the assets test threshold. What that means is if a pensioner exceeds the asset test by $100,000, their pension reduces by $150 per fortnight, or $3,900 p.a. If they can earn more than 3.9% p.a. on that asset, then they may be better off investing the money rather than taking the pension.

Post 1 January 2017, the asset thresholds will increase to:

Single Homeowner $250,000

Single Non-Homeowner $450,000

Couple Homeowner $375,000

Couple Non-Homeowner $575,000

​But here’s the sting. When assets exceed the new threshold, the pension will be reduced by $3 per fortnight for every $1,000 excess of assets. So, if assets exceed the new threshold by $100,000 the pension would reduce by $300 per fortnight, or $7,800 p.a. Those assets would need to earn more than 7.8% p.a. for the pensioner to be better off. In this market, that will not be easy to achieve.

​With the new pension rules, the magic number is 7.8%. If a pensioner sells an asset to fund an improvement in the family home, the pension may increase $7,800 pa for every $100,000 over the assets test.

​Don’t forget the income testOf course, the pension is calculated under two tests: an asset test and an income test (with the one that produces the lowest pension entitlement being applied). With all the hype about the asset test changes, it is important not to forget the income test. The government has not announced any changes to these thresholds.

The income test assumes (or deems) a certain income from investments, regardless of what you actually earn. The current deeming rate on the amount above $49,200 (single) or $81,600 (couple) is 3.25%, a rate of return that you would battle to get from your bank accounts or term deposits. The income test reduces pension entitlement by 50 cents per dollar above the threshold, regardless of whether it is actual income or deemed.

Let’s look at some examples, starting with a winner …Betty is a single homeowner with $248,000 of assessable assets outside her home.Her pension entitlement now is $819 per fortnight, and post 1 January 2017 her pension will be $877 per fortnight if the majority of Betty’s assets don’t produce income: for example cars, caravans, boats, vacant blocks of land and trusts don’t produce taxable income.

But what if Betty’s assets were primarily income producing? If she has $240,000 in investments and $8,000 in personal assets, then she is still a pension winner but her pension will increase by only $4 per fortnight not $58.

Now let’s look at those who will stay the same, which is basically anyone who is currently receiving the full pension. Why? Because the changes will increase the asset test thresholds but anyone on a full pension is already under the required level.

Kevin is a single homeowner with $130,000 in investments and $20,000 in personal assets. He is entitled to $877 per fortnight under the asset test and the same under the income test. From 1 January 2017, his pension will remain the same.

As an example of how people will lose out under these changes, Fred and Shirley are homeowners with $600,000 in investments and $50,000 in personal assets.

They currently receive $792 per fortnight of pension entitlement (combined) and they earn $15,000 p.a. from their investments, meaning that their combined annual income is a little over $35,000.

Post 1 January, their pension will drop to around $497 per fortnight (combined), which means that their combined annual income (assuming they continue to earn $15,000 p.a. from their investments) will be around $28,000.

What’s all this mean?I think there are a couple of messages here.

The first is clear. The Government is determined to rein in spending and means-testing arrangements will only get tougher, not easier.

And the second is a little more subliminal - cash and fixed interest investments are not good long term investments. With the amount pensioners are deemed to earn being more than they are actually earning, they are being encouraged to seek higher incomes than those available from bank deposits.

While these changes are the biggest we have seen in 10 years, don’t expect to have to wait another 10 years for the next lot.

And finally, if you know people who are on the pension, dont let these changes come as a shock to them. Send them a link to this information, and maybe with this little bit of extra knowledge, they can do something about it.

Important - This information is shared with you purely for the purpose of financial education. It is based on generally available information and is not intended to provide you with specific financial advice or take into account your objectives, financial situation or needs. You should consider obtaining financial, tax or accounting advice on whether this information is suitable for your circumstances. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. See full Terms and Conditions here.

Xavier

7/11/2016 04:13:00 pm

Tony, based on my understanding of the new thresholds, I get caught out with this. What are some basic strategies I could consider?

Xavier, if you have to ask that question, my advice would be to spend a few bob and get some advice. It's complicated, and the implications of getting this stuff wrong are significant. Make sure it's genuinely independent advice too, at the bottom of this reply are a couple of resources to find independent advisers.

Having said that, I've implemented 4 basic assets test reduction strategies on behalf of clients, these being contributing to superannuation in the name of a spouse under age pension age, improving the principal home, gifting early or within allowable limits and long term annuities with a depleting asset value.

I emphasise that these strategies were implemented after a comprehensive review of the individual client need, an analysis of all the options and review of the pros and cons.

Maybe you should be doing the same?

Independent adviser lists can be found below, together with some great tips on how to choose an adviser.